IFRS 27 GROUP ACCOUNTS

CONSOLIDATED STATEMENT OF FINANCIAL POSITION /STATEMENT OF

COMPREHENSIVE INCOME
BY C. NYIRENDA

Learning objectives

Upon completion of this Chapter, students should be able to:

 Define and explain key concepts relating to group accounts

 Prepare a simple set of group accounts

 Identify and adjust intra group items in group accounts

INTRODUCTION

Group Accounts is one of the most important topics of this paper Advanced Financial
Accounting and Reporting. It is for this reason that this topic - Group accounts has been
included early in the text so that a candidate has an advance encounter to the core areas of the
subject.

The aim of this chapter is to provide a basic understanding and knowledge of group accounts.
Subsequent chapters will then build upon this knowledge. The key accounting standards that
relate to group accounts include:

a. IFRS 27 Consolidated and Separate Financial Statements

b. IFRS 28 Investments in Associates

c. IFRS 31 Interests in Joint Ventures

d. IFRS 3 Business Combinations

Many business enterprises today operate in a group of enterprises. Hence this chapter explains
the significance of group accounts, the regulatory framework for group of entities and the
preparation of a basic set of group of accounts.

Consolidated Accounts

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The term group accounts, is sometimes referred to as Consolidated accounts. Consolidation is a
process of merging the Financial Statements of two or more group enterprises together. This
involves the integration of the holding entity and its subsidiaries’ Financial Statements. The
Financial Statements to be Consolidated, include the Income Statement, Cash Flow Statement
and the Balance Sheet.

IFRS 27 – Consolidated and Separate Financial Statements

This accounting standard provides the basic guidelines and principles on the preparation of a set
of group accounts. It sets the framework and the foundation on which the concept hinges.

IFRS 27 has the twin objectives of setting standards to be applied:

a. In the preparation and presentation of Consolidated Financial Statements for a group of

entities under the control of a parent and;

b. In accounting for investments in subsidiaries, jointly controlled entities and associates

when an entity elects or is required by local regulations, to present separate (non
Consolidated) Financial Statements.

Key definitions relating to IFRS 27

Consolidated Financial Statements. The Financial Statements of a group presented as those of

a single economic entity.

Subsidiary. An entity including an unincorporated entity as a partnership that is controlled by

another entity (known as the parent)

A group consists of two or more enterprises, which have a special parent/subsidiary relationship.
The parent/subsidiary relationship is created when a parent enterprise or holding enterprise can
exercise control over its subsidiary.

IFRS 27 defines control as the power to govern the financial and operating policies of an
enterprise so as to obtain benefits from its activities. Control normally arises if the parent entity
acquires majority of voting rights in a subsidiary undertaking. This is evidenced by the parent
enterprise acquiring more than 50% shares in the subsidiary entity.

A parent enterprise or holding enterprise is an entity that owns and controls one or more
subsidiaries, for instance A Plc might own one or more subsidiaries. A subsidiary is an enterprise
or an entity controlled by another enterprise known as the parent enterprise.

Identification of subsidiaries

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Control is presumed when the parent acquires more than half of the voting rights of the
enterprise. Even when more than one half of the voting rights are not acquired, control may be
evidenced by power:

a. over more than one half of the voting rights by virtue of an agreement with other investors
or

b. to govern the financial and operating policies of the other enterprise under a statue or an
agreement or

c. to appoint or remove the majority of the members of the Board of Directors or

d. to cast the majority of votes at a meeting of the Board of Directors

Presentation of Consolidated accounts

A parent is required to present Consolidated Financial Statements in which it consolidates its

investments in subsidiaries except in one circumstance. A parent need not present Financial
Statements if and only if all of the following conditions are met:

a. The parent is itself a wholly owned subsidiary or is a partially owned subsidiary of

another entity and its other owners, including those not otherwise entitled to vote, have
been informed about and do not object to the parent not presenting Consolidated
Financial Statements.

b. The parent’s debt or equity instruments are not traded in a public market

c. The parent did not file nor is it in the process of filing its Financial Statements with a
Securities Commission or other regulatory organization for the purpose of issuing any
class of instruments in a public market and

d. The ultimate or any intermediate parent of the parent produces Consolidated Financial
Statements available for public use that comply with International Financial Reporting
Standards (IFRSs).

The Consolidated accounts should include all of the parent’s subsidiaries, both domestic and
foreign. There is no exception for a subsidiary whose business is of a different nature from the
parent’s. Also, as a result of an amendment of IAS 27 by IFRS 5 there is no exception for a
subsidiary for which control is intended to be temporary because the subsidiary is acquired and
held exclusively with a view to its subsequent disposal in the near future.

Special Purpose Entities (SPEs) should be Consolidated where the substance of the relationship
indicates that the SPE is controlled by the reporting enterprise. This may arise even where the
activities of the SPE are predetermined or where the majority of voting or equity are held by the
reporting enterprise.

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Once an investment ceases to fall within the definition of a subsidiary, it should be accounted for
as an Associate under IFRS 28, as a Joint Venture under IFRS 31 or as an Investment under
IFRS 39 as appropriate.

Consolidation procedures

Intra group balances, transactions, income and expenses should be eliminated in full. Intra group
losses may indicate that an impairment loss on the related asset should be recognized.

The Financial Statements of the parent and its subsidiaries used in preparing the Consolidated
Financial Statements should all be prepared as of the same reporting date, unless it is
impracticable to do so. If it is impracticable a particular subsidiary to prepare its Financial
Statements as of the same date as its parent, adjustments must be made for the effects of
significant transactions or events that occur between the dates of the subsidiary’s and the parent’s
Financial Statements. And in no case may the difference be more than three months.

Consolidated Financial Statements must be prepared using uniform accounting policies for like
transactions and other events in similar circumstances.

Minority interests should be presented in the Consolidated Balance Sheet within equity, but
separate from the parent’s shareholders’ equity. Minority interests in the Profit or Loss of the
group should also be separately presented.

Where losses applicable to the minority exceed the minority interest in the equity of the relevant
subsidiary, the excess and any further losses attributable to the minority are charged to the group

Unless, the minority has a binding obligation to, and is able to, make good the losses. Where
excess losses, have been taken up by the group, if the subsidiary in question subsequently reports
profits, all such profits are attributed to the group until the minority’s share of losses previously
absorbed by the group has been recovered.

Separate Financial Statements of the parent or investor in an Associate or Jointly

controlled entity.

In the parent’s/investor’s individual Financial Statements, investments in subsidiaries, associates

and jointly controlled entities should be accounted for either:

a. At cost or

b. In accordance with IFRS 39.

Such investments may not be accounted for by the equity method in the parent’s/investor’s
separate statements.

Disclosures

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Disclosures required in Consolidated Financial Statements include:

 The nature of the relationship between the parent and subsidiary when the parent
does not own, directly or indirectly through subsidiaries, more than half of the voting
power.

 The reasons why the ownership, directly or indirectly through subsidiaries of more
than half of the voting or potential voting power of an investee does not constitute
control.

 The reporting date of the Financial Statements of a subsidiary when such Financial
Statements are used to prepare Consolidated Financial Statements and are as of a
reporting date or for a period that is different from that of the parent and the reason
for using a different reporting date or period and

 The nature and extent of any significant restrictions on the ability of subsidiaries to
transfer funds to the parent in the form of cash dividends or to repay loans or
advances.

Disclosures required in separate Financial Statements that are prepared for a parent that is
permitted not to prepare Consolidated Financial Statements may include;

 The fact that the Financial Statements are separate Financial Statements, that the
exemption from consolidation has been used, the name and country of incorporation or
residence of the entity whose Consolidated Financial Statements that comply with
IFRS have been produced for public use and the address where those Consolidated
Financial Statements are obtainable.

 A list of significant investments in subsidiaries, jointly controlled entities and

associates, including the name, country of incorporation or residence, proportion of
ownership interest and if different proportion of voting power held and

 A description of the method used to account for the foregoing investments.

Need for Group Accounts

Where a parent enterprise has a subsidiary IFRS 27 requires the parent entity to produce group
accounts. Group accounts are usually in the form of Consolidated Accounts.

Consolidated Accounts provide useful and helpful information to key stakeholders that use a
firm’s Financial Statements. They provide complete information that directors and management
of an enterprise need in order to control the enterprise effectively.

An overall view of the group is provided for management to run the group effectively.

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Group accounts enable shareholders get a full picture of how the group in which they invested is
performing.

Acquisition Accounting.

This is the most common method used in business combination. It is an approach used when
consolidating business Financial Statements. It is used when one enterprise takes over another
i.e. control passes from one enterprise to another. It is also used when an investor pays cash or
sometimes loans, shares or a combination of these purchase combination elements.

Features of acquisition Accounting

1. Share premium

Shares issued as purchase consideration are recorded at their market value. Thus any
excess over their nominal value is carried to the Share Premium Account.

2. Goodwill

Acquisition accounting is concerned with fair values. Net assets of a subsidiary are
normally acquired at fair values (market price). Assets of a subsidiary are often revalued
at the date of acquisition to fair values to reflect the value of the assets or net assets.
When the holding enterprise pays a price, which is greater than the fair value of the net
assets acquired, the difference is called Goodwill.

Types of goodwill.

a. Positive goodwill. This is sometimes referred to as purchased goodwill. It arises

on acquisition of an entity, when the purchase price is more than the net assets
acquired at fair value. Positive goodwill maybe shown as an intangible non
current asset in the Balance Sheet..

b. Negative Goodwill. Negative Goodwill arises when the purchase price paid by a
parent enterprise to acquire a subsidiary undertaking is less than the net assets
acquired.

3. Accumulated profits

The Consolidated Accumulated Profits comprise the holding enterprise’s profits and the
group’s share of the subsidiary’s post acquisition reserves. The subsidiary’s profits are
categorized between the pre acquisition and post acquisition reserves. The subsidiary’s
pre acquisition profits are used to help calculate the net assets and goodwill on
acquisition of the subsidiary enterprise. The post acquisition profits are Consolidated
together with the parent enterprise’s total profits.

4. Share capital
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 The only share capital that is Consolidated in the group Financial Statements is that
which relates to the parent enterprise only. The parent entity is assumed to be the source
and provider of capital used in the business activities.

Principles used in preparing group accounts

1. The Consolidated Balance Sheet includes all the assets and liabilities of both the parent
enterprise and its subsidiaries.

2. The Consolidated Income Statement consists of all the revenues and expenses of both the
parent enterprise and its group subsidiaries.

3. Any of the profit or loss of the subsidiaries, which does not belong to the group, is
deducted as belonging to the minority interest.

4. Since the net assets of the subsidiaries are included along with other assets and liabilities,
the investment in subsidiaries from the parent’s Balance Sheet does not appear in the
Consolidated Balance Sheet. It is used in calculating the goodwill on consolidation.

5. The share capital in the Consolidated Balance Sheet is recorded at cost and is represented
by the capital of the holding enterprise. The subsidiary’s share capital is used in
calculating the goodwill on consolidation and the minority interest share.

6. Accumulated profits in the Consolidated Balance Sheet will consist of the parent
enterprise’s total profits and the group share of the post acquisition profits of the
subsidiary enterprise. The outsiders’ share of the subsidiary’s profits, are used in
calculating the minority interest’s share.

7. Transactions between undertakings within the group should be eliminated together with
any profit on them. This may include trade receivables, trade payables, loans, loan
interest and current accounts etc.

8. The holding enterprise will have an asset on its Balance Sheet – investments in subsidiary
– which is the cost of acquiring the subsidiary enterprise. The subsidiary entity will still
show all of its share capital, even though some or all of it is owned by the holding
company. When group accounts are prepared these two will need to be eliminated.

The Consolidated Balance Sheet

The aim of a set of Consolidated Accounts is to disclose the results and the state of affairs of the
group in such a way as would be appropriate if the activities, assets and liabilities of the group
were of a single legal entity.

Thus the Consolidated Balance Sheet is a combination of the parent enterprise’s Balance Sheet
and the subsidiaries Balance Sheet, as at the end of a financial year. It shows the net worth of the

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group as whole. The main purpose of preparing a Consolidated Balance Sheet is to show the
group financial position as if it were one entity.

Common adjustments that affect the Consolidated Balance Sheet include the following:

a. Post acquisition profits

b. Pre acquisition profits

c. Minority interest

d. Goodwill

e. Unrealized profit on inventory

f. Dividends

g. Intra group sale of non current assets

POST ACQUISITION PROFITS

When preparing a Consolidated Balance Sheet, one of the common adjustment, is the treatment
of post acquisition profits. The post acquisition profits are profits generated by a subsidiary
enterprise after being acquired by the parent enterprise. These are the profits that are
Consolidated together with the parent entity’s accumulated profits.